Competing creditor claims and loan recoverability : Evidence from anti-recharacterization laws

Using the state-level adoption of anti-recharacterization laws (ARLs), this paper examines how strengthening the rights of some creditors affects other creditors’ claims. The adoption of an ARL significantly increases the rights of securitization creditors by denying bankruptcy court judges’ discretion to determine the asset transfer as debt collateral and allowing buyers of securitized assets to seize the collateral in bankruptcy. However, improving the rights of securitization creditors limits the ability of other creditors to recover loans. We find that banks operating in states that adopt an ARL accrue more loan loss provisions after the adoption. This effect is stronger for banks with higher exposure to the corporate loan market. These findings are consistent with the argument that offering safe harbor for securitization transactions provides advantages to Wall Street-style structured finance at the expense of Main Street-style lending. Consistent with the competing creditor-claims hypothesis, we also show that ARL adoption leads to higher future loan charge-offs, increased non-performing loans, and decreased corporate loans